IRS Failure to Deposit Penalty Rate

20.1.4.2  (05-22-2009)
Failure to Deposit Penalty Rate

  1. The FTD Penalty is charged for any failure to deposit correctly. The three components of a correct deposit are that it is made timely, in the correct amount, and in the correct manner.

    1. A failure to comply with any of these components will subject the deposit to the FTD Penalty.

    2. Because there may be multiple deposits (with each individual deposit subject to scrutiny for compliance) on any one account, the FTD Penalty that is assessed on the account will be a sum of the "time-sensitive " penalty(ies) and/or the "avoidance" penalty(ies).

  2. The percentage rate charged depends on the following:

    • The number of days a deposit is late,

    • whether it involves a direct payment, and

    • a non-EFT payment when required to use EFTPS

20.1.4.2.1  (05-22-2009)
Time Sensitive Four Tier Penalty System

  1. There is a time sensitive four-tier penalty system for late deposits. The penalty rate assessed depends on the number of days a deposit is late, as shown below:

    1. 2 percent for deposits 1—5 days late,

    2. 5 percent for deposits 6—15 days late,

    3. 10 percent for deposits made more than 15 days late. Also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due.

    4. 10 percent for deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with the tax return.

    5. 10 percent for amounts subject to electronic deposit requirements but not deposited using EFTPS.

    6. 15 percent (actually, a 5 percent addition to the 10 percent for late payment in (c) above) for all amounts still unpaid more than 10 days after the date of the first notice that the IRS sent asking for the tax due or the day on which the taxpayer received notice and demand for immediate payment, whichever is earlier.

    7. See IRM 20.1.4.11.2.3.

20.1.4.2.2  (05-22-2009)
Deposit Due Dates

  1. Treasury Regulations state that deposits are due on or before the deposit due date. This due date is the last day the deposit can be considered timely. Taxpayers may make their deposit any time between the date the payroll liability is incurred and the date the deposit is due. They are not required to wait until the due date to make a deposit and will not receive a penalty for making deposits prior to the due date. An employer is not required to make a deposit more often than a payroll is made. However, 100 percent of the amount required to be deposited is due on the deposit due date unless the employer meets one of the exceptions. See Exhibit 20.1.4-4 for the safe harbor exception. See IRM 20.1.4.2.2.1 for the de minimis deposit rule.

  2. Unless there are specific instructions to the contrary contained in the Treasury Regulations, the due date is extended to the next day that is not a Saturday, Sunday or holiday if:

    1. The deposit due date is a Saturday, Sunday or Federal Holiday (including all legal holidays in the District of Columbia) or

    2. The deposit due date is a legal holiday of a particular state in which an authorized commercial bank chooses to close in observance of a state holiday.

  3. Deposits are due only on banking days as provided for under IRC section 7503.

    1. In addition to Federal and observed state banking holidays, Saturdays and Sundays are treated as non-banking days. See IRM 2.3.28 Terminal Responses, for a list of Federal and observed state banking holidays.

    2. Employers who are required to deposit taxes on a day that is not a banking day will be treated as timely depositing such taxes if they are deposited on the first banking day thereafter. See IRM 20.1.4.3(4).
      i.     See IRM 20.1.4.3.2 (1)(b) for a discussion of these rules as applied to employers required to deposit on a monthly basis.
      ii.     See IRM 20.1.4.3.2.2 (2) for a discussion of these rules as applied to employers required to deposit on a semi-weekly basis.

  4. Taxpayers are required to deposit their taxes with an authorized depositary. Taxpayers avoid the FTD system when they make payments to other than an authorized depositary. This type of noncompliance is called FTD avoidance and is subject to the FTD penalty. See IRM 20.1.4.2.2.1, De Minimis Exception to Deposit Requirements.

  5. Effective October 17, 1995, any non-EFT deposit made by a taxpayer that is required to deposit via EFT is subject to a 10 percent penalty for not being made in the correct manner. The EFT/FTD penalty (referred to as the Avoidance Penalty) may now be assessed against any deposit required to be made after October 16, 1995.

  6. Payments made to an unauthorized depositary include those made directly to IRS. Transaction code (TC) 670 identifies direct payments and generally indicates that the FTD avoidance penalty applies. There are exceptions.

    1. All TC 670 transmitted by EFT are treated as correctly deposited (effective March 1997).

    2. FEDWIRE payments, made by CT–1 filers, are listed as TC 670 with blocking series 700.

    3. Taxpayers in bankruptcy may be ordered by the court to make payments directly to the IRS. In such cases, the FTD avoidance penalty would not apply. If the account has a bankruptcy indicator, TC 520, closing code (CC) 85–89 with freeze code -V or TC 520, CC 81 with freeze code -W, contact the appropriate Insolvency function to determine if the taxpayer is under court order to make direct payments.

    4. Any TC 670 received after the return has posted (in response to a notice/bill) will not have the avoidance penalty assessed against it. If the taxpayer files the return with a balance owing (has not deposited sufficiently), the notice sent will include the maximum FTD penalty. Payments for delinquent taxes are not to be remitted with a coupon.

  7. Regulations require certain taxes to be paid using deposits. Payments made in a manner other than a deposit may be subject to the FTD avoidance penalty, unless the taxpayer meets an exception.

    1. See Exhibit 20.1.4-4 for the safe harbor exception

    2. See IRM 20.1.4.2.2.1, De Minimis Exception to Deposit Requirements.

20.1.4.2.2.1  (05-22-2009)
De Minimis Exception to Deposit Requirements

  1. While taxpayers must periodically deposit their employment taxes using either the monthly or semi-weekly deposit schedule, the de minimis exception to the deposit rule allows taxpayers to remit their employment taxes with their return instead.

  2. The ROFT information is not required when the de minimis exception for depositing is met.

  3. See IRM 20.1.4.1.1.

  4. When the total tax amount exceeds the de minimis for depositing then taxpayers must periodically deposit their employment taxes using their required monthly or semi-weekly deposit schedule. Any payment of tax paid directly or remitted with the return is subject to the avoidance penalty.

  5. See IRM 20.1.4.2.1 (1)(d) for the avoidance penalty rate.

  6. The following situations illustrate when the FTD penalty may apply based on the de minimis deposit rule:

    1. Form 941—(200103 and subsequent)--The de minimis exception is applicable for tax amounts less than $2500. If the total tax is $2500 or more, any amount paid with the return is subject to the avoidance penalty. (199809 thru 200012)--The de minimis exception is applicable for tax amounts less than $1000. If the total tax is $1000 or more, any amount paid with the return is subject to the avoidance penalty. (199806 and before)--The de minimis exception is applicable for tax amounts less than $500. If the total tax is $500 or more, any amount paid with the return is subject to the avoidance penalty.

    2. Forms 943, 945—(200112 and subsequent)--The de minimis exception is applicable for tax amounts less than $2500. If the total tax is $2500 or more, any amount paid with the return is subject to the avoidance penalty. (199912 thru 200012)--If the total tax is $1000 or more, any amount paid with the return is subject to the avoidance penalty. (199812 and before)--The de minimis exception is applicable for tax amounts less than $500. If the total tax is $500 or more, any amount paid with the return is subject to the avoidance penalty.

    3. Form 944—(200612 and subsequent)--If a quarterly liability amount is less than $2500, Master File considers the deposit as timely if received by the last day of the month after the end of a quarter (mirroring the Form 941 quarterly de minimis, discussed in (a) above). Employment taxes accumulated during the fourth quarter can be either deposited by January 31 or remitted with a timely filed return for the return period. See Exhibit 20.1.4-5.

    4. A safe harbor shortfall (of any amount) originating from a monthly depositor may be paid with the return without an avoidance penalty.

    5. Form 940—If the TC 150 is $500 or less, any amount paid with the return is not subject to the avoidance penalty.

    6. Form 720—(200112) and subsequent)--If the amount from Form 720, Part I is over $2,500, the amount paid with the return may be subject to the avoidance penalty , unless a safe harbor Rule applies. (200109) and before)--If the amount from Form 720, Part I is over $2,000, the amount paid with the return may be subject to the avoidance penalty , unless a safe harbor Rule applies.

    7. Form CT-1—(200112 and subsequent)--If the TC 150 is $2500 or more, any amount paid with the return is subject to the avoidance penalty. (199912 thru 200012)--If the TC 150 is $1000 or more, any amount paid with the return is subject to the avoidance penalty. (199312 thru 199812)--If the TC 150 is $500 or more, any amount paid with the return is subject to the avoidance penalty. (199212 and before)--If the amount paid with the return exceeds $100, it is subject to the avoidance penalty.

20.1.4.2.3  (05-22-2009)
Deposit Due Dates

  1. The deposit due dates are determined by the deposit requirements, which vary according to the tax form involved and the amount of tax.

  2. Before determining the deposit due dates. See Exhibit 20.1.4-4, LEM 20.1.4.2.2, LEM 20.1.4.8, and LEM 20.1.4.9. See IRM 20.1.4.8 of this handbook, for information specific to Form 720.

20.1.4.2.4  (05-22-2009)
Banking Day

  1. Once a bank is recognized by the Federal Reserve Bank (FRB) and considered an authorized financial institution, it can accept tax deposits.

  2. The FRB has established 2:00 p.m. as the federal banking day’s closing time.

  3. Banks may be open for business (for the convenience of their customers) later than the regulated bank day cut-off.

  4. A bank may have lobby/drive-through hours until 4:00 p.m. However, you may notice postings such as "All deposits made after 2:00 p.m. will be credited to the next business day." For example:

    1. Taxpayer A has a deposit due on Wednesday. His bank, an authorized financial institution, has 3:00 p.m. as its banking day cut-off time. This bank has lobby hours Monday through Friday until 5:30 p.m.

    2. Taxpayer A makes his FTD deposit at 5:00 p.m. on Wednesday. The bank teller’s stamp on his FTD coupon, Form 8109, will reflect receipt of this deposit on Thursday’s business day. The teller’s stamp may carry additional information, such as, the time and date received or a designation of the calendar day the deposit was received, if this day is different from the business day received.

    3. The Advice of Credit (AOC) and the IRS TC 650 posting date would carry Thursday’s date. This taxpayer will be subject to a 2 percent FTD penalty for being one day late.

  5. The example above is not one of a misdated deposit, unless the bank held the deposit. In the example above, a misdated deposit would be evidenced by the coupon carrying the Thursday’s date, but the AOC would show a date for Friday or later. See IRM 20.1.4.14 for more information on misdated deposits.

  6. FMS Regulations extend only to the stamping and acceptance of the coupon and the AOC. What and how much information is contained on the taxpayer’s receipt from the bank varies from bank to bank.

  7. In the example in (4) above, the taxpayer’s receipt could, in fact, be stamped with the Wednesday calendar date, while the coupon is, also correctly, stamped with the Thursday business date. In these cases if there is also a time stamp, and it gives any indication of being past a normal bank business day cut off time, it is still the taxpayer's responsibility (the burden of proof rests with the taxpayer) to prove (with a statement from the bank) that the payment was made on the correct day.

20.1.4.2.5  (05-22-2009)
Bank Holidays

  1. Bank holidays are days authorized by the individual states banking regulations for authorized commercial banks within their state to be closed. Banks don’t have to close on these days but are allowed by the state controlling authority to be closed for business if they choose to do so. See IRM 20.1.4.2.2 (3) for information on how bank holidays affect deposits due dates.

    1. Though not all states recognize state holidays, some states authorize several state holidays that may be observed by authorized commercial banks.

    2. IRM 2.3.28 lists the state banking holidays observed by authorized commercial banks.

    3. Both Master File and IDRS are programmed to recognize state bank holidays observed by authorized commercial banks. See IRM 20.1.4.11.2.1.

20.1.4.2.6  (05-22-2009)
Application of Payments

  1. Payments are identified on Master File as follows:

    • TC 610—Payment received with a return—depending on the reason for the payment with the return, this payment may be liable for the avoidance portion of the FTD penalty.

    • TC 670—Subsequent payment— See IRM 20.1.4.14.2 for possible FTD avoidance penalty.

    • TC 650—Federal Tax Deposit,

    • TC 700—Credit Applied,

    • TC 706—Overpayment Offset into a Balance Due Module,

    • TC 760—Substantiated Credit Payment Allowance,

    • TC 710—Overpayment Credit Applied from Prior Tax Period

    • TC 716—Generated Overpayment Applied from Prior Tax Period, and

    • TC 766 —COBRA Credit (Credit Reference Number (CRN) 299).

  2. On a TC 706 overpayment, Master File will only use the credit against the 4th Tier 15 percent Penalty amount. Otherwise the credit is not recognized in the penalty calculation.

  3. If the TC 716 Credit Availability Date is not present (e.g., on CP 194, BMFOL, etc.)., Master File will use the first day of the tax period as the credit effective date.

  4. On a TC 710 credit transfer, Master File will use the first day of the tax period as the credit effective date.

  5. For periods after December 31, 2001, deposits are applied to the most recently ended deposit period or periods within the specified tax period to which the deposit relates as provided for in Rev. Proc. 2001-58. The application of deposits to the most recently ended deposit period will, in some cases, prevent the cascading penalties where a depositor either fails to make deposits or makes late deposits. See the job aid on the Most Recent Payment Allocation Method located in Chapter 7 of IRM 21 Job Aids.

  6. For periods beginning April 1, 1991 through December 31, 2001, deposits are applied in date-made order against deposit liabilities in due-date order. This is referred to as the FIFO (first in, first out) method of assigning deposits to liabilities.

    1. Accordingly, apply deposits (deposit, payment, credit) in date-made order to the first liability (in due date order) within the same return period. Satisfy the oldest liability first. Liability age is determined by the liability’s incurred date.

    2. All credits will be arranged by date order to determine the next available credit. The Credit type (the origin of the credit) does not affect its date-made order. However, an avoidance penalty may not be appropriate.

    3. For example: A taxpayer has liabilities of $1,000 in April, May and June. The taxpayer is required to deposit monthly and makes timely deposits of $1,000 on May 15, June 15 and July 15. A direct payment of $3,000 is received on April 7 and is applied to this quarter. An incorrect manner (avoidance penalty) may not be an appropriate penalty in this situation.

    4. Effective April 1, 1991, the amount required to be deposited is determined by (100 percent of) the liability amount and not the undeposited amount.


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